Despite perception, banks say they’re lending to small businesses

Published: May 7, 2010

New Hampshire community banks have been insisting for months that they have money to lend – and have been doing so all along, despite the recession and gloomy media reports. Yet the perception persists that there’s no money to be had for small businesses.The situation, says Gerald Little, president of the New Hampshire Bankers Association, has left him and the association’s members “scratching their heads” over why community banks have acquired the reputation that they are not lending.“Every community bank has actually increased its loan book right through the recession. So, if they’re lending more, where’s the reduction come from?” asked Little.It was that “disconnect,” as Little calls it, that prompted the association to call for an independent study into the situation.Released earlier this year, “Credit Where Credit is Due: Trends in Small Business Lending in New Hampshire,” was conducted by Dover economist Brian Gottlob of PolEcon Research. It showed that, while national lending dropped by 16 percent in 2008, lending only dropped by 6 percent in New Hampshire during that year – a “significant difference,” says Little.According to Little, the 6 percent decline “could easily be explained as a significant reduction in loan demand. During a recession, businesses just request less credit — sales drop off, so they’re watching cash flow.”While some banks pulled back in 2008, more recently, according to Witmer Jones, New Hampshire district director of the SBA, his agency’s lending is “up significantly compared to last year.”While the SBA doesn’t lend money itself, it provides guarantees – currently up to 90 percent of the loan – to banks on behalf of qualified business owners. If the borrower defaults, SBA pays off its guaranteed portion of the loan, leaving a bank on the hook for much less.According to loan activity reports provided by the U.S. Small Business Administration to NHBR, the New Hampshire district SBA office assisted banks with 387 loans, worth nearly $70 million, from October 2009 through March 2010 – an increase of some 191 percent from October 2008 through March 2009, when there were 203 loans, worth $27.7 million.A ‘track record’Gregg Tewksbury, president and chief executive of Savings Bank of Walpole, says his bank hasn’t changed its lending standards, now or during the worst of the recession.“Our percentages haven’t changed,” he says, adding that the bank wrote $70 million in loans last year — a 6 percent increase.“Not only did we meet existing volume, we added new loan volume,” says Tewksbury.So why are community banks getting the bad rap?“It used to be that if you had good, strong personal credit, you’d get a loan. Now that’s not enough. You’ve got to have a track record and positive cash flow, as well as proving positive cash flow for years out,” says Christine Davis, executive director of the Women’s Business Center, which works with business start-ups as well as more established companies.Davis says she “understands the point of view of the banks,” but for new businesses “it’s very difficult to get money.”Research in the report revealed that it was quite possible that more stringent lending criteria at the larger banks – which traditionally, and cyclically, occurs across the board during a recession, according to Little – may have tainted the perception that all banks have become unusually tight-fisted with their cash.Community banks, by their very nature, don’t make the same kinds of investments as large national or regional banks have made, and they have been unhurt by the ailments that have famously afflicted so many of the nation’s larger banks.“We have several large banks in our market, and those folks have pressures on them that don’t apply to New Hampshire in general,” says Little. “They have invested in markets overseas or elsewhere in the country.”Fewer optionsMeanwhile, says the SBA’s Jones, business owners’ personal financial situations have changed dramatically from two or three years ago — and that has had a big impact on how they can approach loans today.“Two or three years ago, most business owners had significant equity in their residences,” he said. “They could finance their costs entirely, or show to the bank they’ve put significant amount of their own money toward their business.”Today, however, that equity is no longer there.As an example, according to Tewksbury, “If we’d lend 80 percent on a house appraised at $300,000 a few years ago, we’d still lend 80 percent on that house if it was now appraised at $250,000.”Jones says some businesspeople take the risky but common path of relying on credit cards for financing, intending to seek better terms from a bank loan later.“But now people’s credit cards have become a less reliable source,” he says.And household incomes have taken as much as a beating as houses themselves.“A few years ago, there were probably two income earners to show income to the bank when applying for a loan. Now there may only be one,” says Jones.So what are business owners looking for a loan to do?Lower debt ratios and increase savings, says Little. “That’s really what a lender needs to see. Are debt ratios reasonable? Is there documentable cash flow through the life of the loans?”Little also recommends any business should visit organizations like the Small Business Development Center or SCORE to get advice on their business plan before going to a bank.“You’re not an individual asking for a loan anymore — you’re a business. It needs to be professional,” he said.Walpole Savings’ Tewksbury says business owners should consider going to a community bank for a loan because of the personal service.“If you have a unique story to tell and your numbers don’t fit some automated underwriting, you will have the opportunity to share that story with a community bank,” he said. “You can have the opportunity to provide some insight into those numbers that you might not have at some of the larger shops.”Even so, Tewksbury says his bank looks for how much the business owners have put themselves on the line.“We look for ‘skin in the game’ — how much money or what assets is the owner putting in,” says Tewksbury. “We really look at each on a case-by-case basis.A copy of the report may be downloaded at nhbankers.com.Cindy Kibbe can be reached at ckibbe@nhbr.com.

This article appears in the May 7 2010 issue of New Hampshire Business Review